Security and adequacy of supply in South Africa – a point of view on

associated challenges and some solutions

Presentation to 21st AMEU Technical ConventionGallagher Estate, Midrand, 17 October 2006

byVally Padayachee, Director, City Power JHB Pty Ltd &

Tore Horvei, CEO, SAD-ELEC (Pty) Ltd

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 2

Presentation outline

Key messages

Security and adequacy of supply – what are the issues?

Demand side overview

Supply side options

Demand and supply balance

Security of supply

Some solutions

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 3

Key messages

South Africa’s electricity industry is fast eroding its current capacity System reserve margin is already very low

There is uncertainty in the future demand growth Current electricity demand growth 3.0 – 3.5% p.a. Higher GDP growth rates increase pressure on electricity supply system Reduced demand elasticity expected in medium to longer term

Decisions about new generating plant must be fast tracked To meet incremental growth in demand To restore system reserve margin to an acceptable level Governance and decision making frameworks are being put to the test

Readily available generation options are limited in the near to medium term OCGT solution being introduced to address peaking capacity shortages, Coal-fired plant will continue to dominate the base load market Natural gas (for CCGT and CHP applications) and nuclear have roles to play DSM, demand side participation and distributed generation need to feature more strongly

In summary: Security and adequacy of supply can become a real concern Collaborative efforts by all industry players (generators, distributors and customers) are

required to address the challenges – strategic partnerships are required

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 4

Security and adequacy of supply

Secure, reliable and adequate electricity supply is critical to economic and social growth and development in South Africa

Security of supply – the issues: Sustained availability of existing generating plant and power system Improved composition of plant mix Broadening technology and fuel choice Restoring a reasonable system reserve margin Timely decisions on new generation expansion Clarification of framework for private sector participation

Adequacy of supply – other issues: Engagement with customer to ascertain expectations and trade-offs Clarification of EDI reform process to unblock supply capacity constraints,

particularly in metro areas Harmonised and streamlined regulatory frameworks

Demand Side Analysis

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 6

Eskom peak demand & energy sales(1994 – 2006)

140,000

150,000

160,000

170,000

180,000

190,000

200,000

210,000

220,000

19941995 19961997 19981999 2000 20012002 20032004 20052006

24,000

26,000

28,000

30,000

32,000

34,000

36,000

MW GWh

Average growth rates:- 2.9% p.a. in MW since 1994- 3.1% p.a. in MW since 2000- 3.2% p.a. in GWh since 1994- 3.7% p.a. in GWh since 2000

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 7

GDP growth viz. electricity demand(Q1 1993 to Q2 2006, Source: Stats SA)

Electricity Distributed and real GDP Growth

(quarterly moving average)

1

1.1

1.2

1.3

1.4

1.5

1.6

IndexBase Q1 '93

3.3% Growth

GWh Growth GDP Growth

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 8

GDP growth viz. electricity demand (II)(Q1 1993 to Q2 2006, Source: Stats SA)

Quarterly Energy and GDP Growth

(Based on 4-quarterly moving average)

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

El Growth GDP Growth

Quarterly Growth Rate

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 9

GDP growth viz. electricity demand (III)

Will the historic relationship between GDP growth and electricity demand prevail?

A weakening of the ‘one-to-one’ relationship is expected towards lesser interdependency: In the short to medium term, an increasing share of GDP growth will come from

large but less energy intensive infrastructure projects Significant growth in less energy intensive sectors of the economy such as

financial services and ICT as well as tourism, representing a structural change in composition of South African GDP

Success for Demand Side Management (DSM) initiatives, primarily targeting growth in peak demand

Changes in energy market dynamics: LPG substituting some electricity usage in domestic/commercial sectors Natural gas increasing its share of commercial and industrial markets

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 10

Some sector observations

Electricity demand (2005)

48%

18% 8%

19%

3%

4%

Manufacturing MiningCommercial DomesticTransport Others

Expected changes in relative demand composition Manufacturing: relative stable Mining: gradual decrease Commercial: increase due to

importance of service sectors Domestic: increase due to

disposable income growth and electrification

Transport: increase in short to medium term, linked to infrastructure investments and commodity ‘boom’

Others: no major change

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 11

Demand & capacity scenarios(Source: Eskom)

The relationship between GDP growth and electricity demand growth is changing

The economic growth rate is increasing (with Government targeting 6% p.a.)- what is the impact on new capacity requirements?

GDP growth p.a. Electricity growth p.a.

Total capacity required 2005-25

Annual capacity required 2005-25

3.0% 1.4% 11,772 MW 620 MW

4.0% 2.3% 20,824 MW 1,097 MW

5.0% 3.2% 32,257 MW 1,698 MW

6.0% 4.4% 47,252 MW 2,485 MW

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 12

Demand growth scenarios

Official registered system peak demand reached 34,800 MW on 29 June 2006

Annual peak demand growth from 2006 – 2010 estimated at 3.2% based on short to medium term economic growth forecasts

From 2010, two (Eskom) demand growth scenarios are considered:

Low case: 4% GDP growth p.a.

Electricity demand growth of 2.3% p.a.

High case: 6.0% GDP growth p.a. (based on ASGI-SA, Government’s Accelerated and Shared Growth Initiative)

Electricity demand growth of 4.4% p.a.

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 13

Peak demand forecasts (in MW)

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

High growth (6% GDP growth from 2010) Low growth (4% GDP growth from 2010)

Demand - Supply Balance and Supply Side Options

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 15

Maximum available generating capacity

Note: Non-Eskom capacity has considerably lower reliability than Eskom’s plant (average 87.4% in 2005/06)

Existing System Capacity MW

Eskom Coal-fired plants 32 431

Eskom Nuclear 1 800

Eskom Pumped Storage 1 400

Eskom Hydro 560

Eskom Gas Turbines 342

Total Eskom 36 533

Cahora Bassa Hydro (HCB) firm 1 281

Total Eskom Controlled 37 814

Non-Eskom Coal-fired plants 1 920

Non-Eskom Pumped Storage 180

Non-Eskom Hydro 65

Non-Eskom Gas Turbines 270

Total Non-Eskom 2 435

Total Existing System 40 249

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 16

Plant availability is high, but is it sustainable?(Source: Eskom Annual Report 2005, UCF = Unit Capability Factor)

70

75

80

85

90

95

100U

CF

%

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05year

Actual International medianInternational best quartile

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 17

Generation portfolio – a mismatch viz. system requirements

-

5 000

10 000

15 000

20 000

25 000

30 000

35 000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Hour of the Day

Max

imu

m H

ou

rly

Dem

and

(M

W)

Peaking

Mid merit

Base Load

Base load (72%)

Peaking (15%)

Mid merit (13%)

These needs are poorly matched by the composition of SouthAfrican generating plant (>93% base load)

These needs are poorly matched by the composition of SouthAfrican generating plant (>93% base load)

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 18

System reserve margin requirements

A power system needs a certain amount of reserve capacity to manage planned and unplanned outages

International experience indicates a 15% reserve margin as appropriate for large and complex power systems

Eskom has traditionally applied a reserve margin of 12.5% in its strategic electricity planning

With entry of IPPs, system reserve margin requirements increase as the System Operator is no longer in full control over plant outage planning and scheduling

As of winter 2006, the reserve margin on the Eskom system reached a low 6-7%

A reserve margin by 2015 and thereafter of 12.5% in Low Case growth scenario and 15.0% in High Case growth scenario respectively was assumed

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 19

Demand - supply balance: an increasing gap!

South Africa System Maximum Demand Forecastand Committed Generation Expansion Plan

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

80,000

85,000

90,000

95,000

2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

MW

Available 2006 Committed De-mothballing Committed OCGTProject Alfa Pumped Storage High demand (6% GDP growth from 2010)Low demand (4% GDP growth from 2010)

Generation capacity includes HCB and is adjusted to reflect a 15% reserve margin

Includes committed international sales (Mozal, Swaziland etc)

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 20

And existing plant have to be replaced......

Eskom's Installed profile

WilgeTaaibos Salt RiverHighveld

KomatiIngagane

CamdenGrootvlei

Hendrina

Arnot

HF Verwoerd

Kriel

Acacia

Port Rex

Vanderkloof

Matla

Duvha

Drakensberg

Koeberg

Tutuka

Lethabo

Matimba

Palmiet

Kendal

Majuba 1-3Zesco

Cahora Bassa

Camden

Majuba 4-6

KomatiGrootvlei

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

55 60 65 70 75 80 85 90 95 00 05 10 15 20 25 30 35 40

Year

Meg

aw

att

In

sta

lled

55 60 65 70 75 80 85 90 95 00 05 10 15 20 25 30 35 40

Dashed line = Approved peak demand + 20% Reserve Margin

Most power stations are at mid-life refurbishment point, with life extension of several plant expected

Retirements expected before 2030 include:• 2019: Acacia / Port Rex: • 2023: Hendrina• 2024: Arnot• 2027: Kriel

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Eskom’s ‘new project funnel’ creates many opportunities

(Source: Engineering News, Vol 16 No. 18, 19-25 May 2006)

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Generation expansion & technology choice(Up to 2015)

Up to 2015 the following generation options are being pursued: De-mothballing of Simunye plant (Camden, Grootvlei and Komati)

Total of 3,600 MW of capacity to be added

Arnot coal-fired expansion: 300 MW Liquid fuel fired Open Cycle Gas Turbines (OCGT)

Eskom (1,050 MW) + DME tender (1,050 MW)

Bramhoek pumped storage plant: 1,330 MW New base-load PF coal plant

Matimba B (2,100 to 4,200 MW) + other coal options?

Potential natural gas fired Combined Cycle Gas Turbines (CCGT) Kudu (800 MW) + Coega (1,600 MW) + Eskom/Sasol co-gen plant?

Is the above enough?

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Generation expansion & technology choice(After 2015)

Post 2015 many technology options exist: Base load options:

PF coal-fired stations CFB coal-fired stations Conventional nuclear plant Pebble-bed nuclear reactor (PBMR)

Mid-merit options: Natural gas fired CCGT plant

Peaking plant options: Liquid fuel fired OCGT plant Pumped storage plant

Commercial scale renewable energy options (e.g. solar-thermal) Import from SADC region (see next slide)

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 24

Potential regional (SADC) projects

Current regional contenders Key criteria

Mmamabula, Botswana (Up to 3,600 MW coal)

Credible technical solution Cost competitiveness Credible off-taker Credible developer Acceptable local power market price Project size vis-à-vis size of local market Alternatively, proximity to regional (often SA

market) Credible transmission integration solution Environmental compliance Acceptable political risks

Morupule expansion, Botswana (Up to 1,200 MW coal)

Kudu, Namibia (800 MW natural gas)

Cahora Bassa North Bank, Mozambique (+/- 850 MW hydro)

Temane, Mozambique (750 MW natural gas)

Kafue Gorge Lower, Zambia (600 MW hydro)

Mpanda Nkwua, Mozambique (1,300 MW hydro)

Moatize, Mozambique (Up to 1,500 MW coal)

Inga III, DRC (3,500 MW hydro (or more) – Westcor project)

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 25

Capacity additions required (in MW)(Source: SAD-ELEC)

Annual MW Additions to meet demand growth and reserve margin (RM)Low Case: 12.5% RM by 2015 / High Case: 15% RM by 2015

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

2005 2010 2015 2020 2025 2030 2035 2040 2045

Low Case High Case

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 26

And the financial challenge is huge!(Source: SAD-ELEC)

Annual Generation Investments (in 2006 Rand millions)LOW CASE & HIGH CASE

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2005 2010 2015 2020 2025 2030 2035 2040 2045

Low Case High Case

Security of Supply –Is the South African ESI up to the

challenge?

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 28

Security of supply – what is required?

Sustained high plant availability Timely decisions on generation expansion

Elaboration of government policy framework is key

Engagement of customers and new approaches DSM and dynamic market participation (DMP) – not only by Eskom but also EDI Co-generation options (Combined Heat and Power – CHP) Distributed generation solutions

Appropriate regulatory frameworks New Electricity Regulation Act provides framework, but detailed regulations are

lacking

Sufficient financial resources Eskom has a strong balance sheet-needs to be sustained? Future tariff increases matter (to Eskom, EDI and IPPs)

17 October 2006 21st AMEU Technical Convention: Security of Supply (Padayachee & Horvei) 29

Security and adequacy of supply – some potential solutions

Improved management of existing assets – by Eskom and EDI

Metro RED creation to alleviate and address current supply capacity constraints in metro areas

More active customer engagement on DSM and DMP – by Eskom and EDI

Increased use of distributed generation solutions – by Eskom and EDI

Progress policy and regulatory framework on IPPs and private sector participation in new generation developments Reconsider management of future generation tenders due to government

capacity and skills constraints

Finalise and implement regulatory framework for co-generation applications

Engage the private sector on proposals for increased use of non-Eskom plant and expansion of such

Vally Padayachee, City Power Johannesburg (Pty) Ltd

Tore Horvei, SAD-ELEC (Pty) Ltd

Thank You!